Gwen Moran

While you might not give much thought to the size of your home loan outside of borrowing what you can afford, larger loans may be subject to different refinancing conditions. These so-called “jumbo” loans are extended by lenders but are often more challenging for lenders to liquidate or sell. As a result, they’re considered riskier products and refinancing them may not be as easy as refinancing a conventional loan.

But it’s not impossible. While lending criteria tightened in the immediate aftermath of the recession, making it more difficult to get or refinance jumbo loans, conditions have largely returned to pre-recession levels, said Tendayi Kapfidze, chief economist at LendingTree.

“There was a period after the crisis where it was a little bit harder to get a jumbo loan,” he said. “I’d say that doesn’t apply anymore.”

Like refinancing any other loan, you’ll want to be sure you shop around to get the best rate on your jumbo mortgage refinance. We’ll cover that and more in this post.

What is a jumbo mortgage?

Behind the scenes, mortgage lenders have an entirely different line of business than writing home loans to consumers. In many cases, they hold those loans for a period of time, then sell them, giving them the liquidity to write more loans.

Fannie Mae and Freddie Mac were created by Congress in 1938 and 1970, respectively, to facilitate this secondary market. These government-sponsored entities are private organizations that receive federal support to purchase these home loans. The entities hold some of the loans and package others into financial products called mortgage-backed securities, which are sold to investors.

These entities are overseen by the Federal Housing Finance Agency (FHFA). Each year, the FHFA announces the maximum conforming loan limits for mortgages that Fannie Mae or Freddie Mac will acquire. These loan limits are affected by location. For most of the country, the maximum conforming loan limit for mortgages on one-unit properties acquired by the two entities will be $453,100, an increase from $424,100 in 2017.

For high-cost areas — defined by FHFA as areas where 115 percent of the local median home value exceeds the baseline conforming loan limit — the maximum loan limit for one-unit properties will be $679,650. Loan limit calculations are established by special statutory provisions in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. For the most part, the limit is $679,650 for one-unit properties in these areas but may be higher in certain locations.

Loans that exceed these parameters are called “jumbo” loans and are not as easily sold. After the recession, the private securitization market shrunk significantly. Prior to the financial crisis, lenders could often sell jumbo loans to other investors, even though they fell outside of conforming loan parameters, Kapfidze said.

After the crisis, investors were more risk-averse and it was more difficult to sell these loans, inhibiting liquidity. But Kapfidze says that market has largely come back, making jumbo loans more available.

“In fact, sometimes you can even get jumbo rates that are lower than conforming mortgage rates,” Kapfidze said. But doing so requires excellent credit and a low loan-to-value (LTV) ratio, as well as meeting other criteria.

“The underwriting guidelines are substantially more difficult,” he said. In general, homeowners who are seeking to refinance their jumbo loans need:

Lower debt. A big part of the mortgage underwriting equation is the borrower’s debt ratio, Thomas said. For jumbo loans, the debt ratio is usually limited to 43%, versus up to 50% for conforming loans.

More resources. Lenders are going to look for greater financial reserves and proof of income, added Lucas Curtolo, senior vice president of national operations for BBMC Mortgage in Lombard, Ill. Typically, lenders will want two years of tax returns instead of a single return or pay stubs. In addition, borrowers will likely need at least six months of principal, interest, taxes and insurance (PITI) reserves in savings or investments.

Lower LTV ratio. Jumbo loan refinances also typically require a lower LTV ratio, or the ratio of the home’s value to the size of the loan. Thomas says the typical loan ratio for jumbo loans is 80% or lower. Conforming loans may go as high as 97.5% depending on the program, he says.

Higher credit scores. While there’s no defined credit score minimum for jumbo loan refinancing, borrowers typically need to have no derogatory information, such as a foreclosure or bankruptcy, within the past several years.

Curtolo said that various lenders may have programs that modify one or more of these requirements, but they may be more expensive. The cost of a loan is dependent on a variety of factors that include the size of the loan, LTV ratio, borrower’s resources and credit and other factors.

If a borrower doesn’t meet all of the requirements, the rate might increase significantly. Hypothetically, a 4.5% annual percentage rate (APR) could increase to 5.5% or a 4.75% rate could jump to 6%, he said. Issues such as the borrower having a foreclosure within the past seven years or a 50% DTI ratio, or trying to use one year of tax returns instead of two to prove income could all contribute to a pricier loan.

“If you’re sitting at a 785-800 FICO, you’re sitting on half a million in the bank, and your debt to income ratio is 20%, you can go get a loan wherever you want,” Curtolo said. “If you’ve got significant derogatory credit and some sort of ulterior factor or a different factor that you need to consider in, then you want to ask around and see what kind of programs are out there.”

When should you refinance a jumbo mortgage?

In June 2018, the Federal Reserve increased the effective federal funds rate a quarter point to 2%. As the economy strengthens, more interest rate increases are expected. So, if borrowers are refinancing to save on their interest rates, they have an increasingly small window in which to do so, Thomas says.

“If you’re going to be looking for [a lower] rate, now is [a] better time than ever,” Curtolo said. However, he says that many people who were seeking to reduce interest rates have already refinanced. He’s seeing more people refinance to extract equity, for example, with a cash-out refinance or home equity loan. They may do so to pay for education, unexpected costs, or home improvement. “We’re seeing a lot of people take out equity in their homes to fix up their house,” he added.

That may be because the median home price nationally is at its highest point ever, Kapfidze said. As home prices rise, homeowners may have more equity to extract for various needs or goals.

How to find jumbo mortgage refinancing

Most mortgage lenders offer jumbo loans, Curtolo says. However, because they are typically loans that lenders are going to hold rather than sell, they may have their own terms and programs, so it’s important to check out various lenders and compare the programs they may have available.

Ask your financial adviser and friends or colleagues who may have recently bought or refinanced a property about their experiences, he adds. An independent mortgage broker may be able to help you get estimates from different lenders. You may also use a mortgage comparison platform like LendingTree to compare offers from various lenders.

How to get a lower jumbo mortgage refinance rate

To get the best rate possible on your jumbo mortgage refinance, the first step is to get your financial house in order. Ensure that your credit score is as high as it can be by checking your credit report for any errors and paying down debt if you can. Be sure you have at least six months of PITI saved and two years of tax returns showing the income level you need for the loan. Meeting the most stringent criteria will help you get the best rate.

Beyond that, ask about various programs and their requirements. One important way that jumbo loans differ from conventional loans is that many are fixed for a period, then convert to adjustable-rate mortgages (ARMs). For example, a 5/1 ARM has a fixed, often lower, APR for five years, and then adjusts once a year for the life of the loan. Typically, the loan terms cap the amount by which interest rates can rise after the first year — often 2%, Thomas says. Then, adjustments will happen according to the loan terms often with a lifetime cap of a 6% increase. But loan terms may differ, so it’s important to understand what you’re getting into, he says.

Thomas recommends that borrowers err on the side of caution in this interest rate environment and lock in a fixed rate for as long as they can upfront, even if the interest rate is slightly higher, as it will allow you to benefit from today’s low interest rates for a longer period before the loan ultimately adjusts.

If you’re close enough to the threshold and have the resources, you may also pay down your loan’s principal balance so that it qualifies as a conforming loan, Kapfidze says. This may help you refinance more easily if you don’t meet all the jumbo loan criteria.

While the jumbo loan market was difficult to navigate in the immediate post-recession years, more of these loans are available. As private investors have re-entered the secondary mortgage market, lenders have options to liquidate them, although many choose to keep them on their balance sheets as portfolio products. Finding the best rate requires squeaky clean financials and at least six months’ of reserves. But even if you don’t meet stringent criteria, shop around — lenders are offering new programs that may give you options for refinancing.